Emissions Compliance Is Not an Option
GHG reporting, climate change disclosure, and future emissions limits
Companies emitting significant greenhouse gases (GHGs) need to take steps now to ensure they are in compliance with current requirements and prepare for new regulatory developments. This article summarizes the impacts of the EPA rule for mandatory reporting of GHGs and guidance from the US Securities and Exchange Commission (SEC) on climate change disclosure and provides some practical tips for the electric utility industry.
EPA’s Greenhouse Gas Reporting Rule
In the wake of the Supreme Court decision in Massachusetts v. EPA¸ 549 U.S. 497, the EPA has begun to regulate GHGs. On September 22, 2009, EPA issued its final rule for Mandatory Greenhouse Gas Reporting (the Rule) 74 FR 56374 (October 30, 2009). The Rule requires certain stationary sources (including electricity-generating units) that emit any amount of GHGs, all stationary sources that emit 25,000 metric tons or more of GHGs, and certain suppliers of fossil fuels and industrial gases to report annually to EPA on the type and volume of GHGs they emit. The Rule does not restrict GHG emissions, but provides information for designing and implementing future control programs. EPA estimates the Rule will apply to approximately 10,000 facilities collectively responsible for 85% of US GHG emissions.
Sources and Gases Covered
The Rule applies to all owners and operators of facilities located in the US, described under 40 CFR § 98.2(a)(1) through (a)(3) and suppliers under (a)(4). Under subparagraph (a)(1), EPA identified 17 categories of sources required to report GHG emissions, regardless of quantity. Electricity-generating sources is one of the identified source categories under paragraph (a)(1).
Under the Rule, “electricity-generating sources” include those electricity-generating units that are subject to the Acid Rain Program under the Clean Air Act (Title IV of the Clean Air Act, 42 U.S.C. § 7651. Title IV of the Clean Air Act establishes goals for reducing annual sulfur dioxide [SO2] and nitrogen oxide [NOx] emissions from electrical utility plants fired by coal, oil, and gas), or are otherwise required to monitor and report to EPA carbon dioxide [CO2] emissions under 40 CFR § 75 (See 40 CFR § 98.40 [Subpart D]).
If an electricity-generating unit is not subject to the Acid Rain Program or required to monitor and report CO2 emissions under 40 CFR § 75, then the source is regulated under Subpart C and is only required to report if the facility emits 25,000 metric tons CO2e (GHGs are measured in units known as carbon dioxide equivalents, or CO2e. Different GHGs have different global warming potentials, or GWP. The GWP of CO2 is 1.0. The Rule provides the GWP for all the GHGs to determine the CO2e. See 40 CFR § 98, Table A-1), or more per year in combined emissions from all stationary fuel combustion units (See 40 CFR § 98.30 [Subpart C]). Note that emissions from portable equipment, emergency equipment, and emergency generators are not included under either source category.
All electricity-generating sources subject to the Rule must report the annual mass emissions of CO2, methane (CH4) and nitrous oxide (N2O). For electricity-generating units subject to Subpart D, the facility must continue to monitor and report CO2 mass emissions as required under 40 CFR § 75. The EPA allows a simple conversion to calculate the reported short tons to metric tons. For electricity-generating units not subject to Subpart D, the source must calculate CO2mass emissions using one of the four methodologies described under 40 CFR § 98.33(a) and (b). For CH4 and N2O mass emissions, a Subpart D source and a regulated Subpart C source must use the calculation methodologies under 40 CFR § 98.33(c).
For Subpart D sources, the Rule does not establish any additional monitoring, Quality Assurance/Quality Control (QA/QC) procedures or additional procedures for estimating missing data. Such facilities shall continue to follow the monitoring, QA/QC procedures and missing data procedures identified under 40 CFR § 75. For Subpart C sources, and depending on the calculation methodology used, there are specific monitoring requirements, QA/QC procedures, or additional procedures for estimating missing data (See 40 CFR § 98.34 and 98.35).
For electricity-generating sources, the Rule does not establish any specific monitoring, QA/QC procedures, or additional procedures for estimating missing data with respect to CH4 and N2O mass emissions, but, as a matter of practice, a facility should install fuel flow meters or keep accurate records to determine the total volume of fuel combusted.
Timing and Annual Report Requirements
Facility owners and operators of regulated sources were required to begin collecting data on January 1, 2010. For electricity-generating units subject to Subpart D, this should not be an issue since all such sources must already monitor and report CO2 mass emissions. For electricity-generating sources subject to Subpart C, the owners and operators were allowed to use “best available monitoring” methods from January 1, 2010 through March 31, 2010. Starting April 1, 2010, owners and operators must follow the applicable monitoring and QA/QC requirements described under 40 CFR § 98.34 and 98.35.
40 CFR § 98.3(c) sets forth the general requirements for the annual report. (On April 12, 2010, EPA published a proposed rule that would also require providing the name, address, and ownership status of the corporate parent, if any, and the North American Industry Classification System code that applies to the facility [See 75 FR 18455]. EPA anticipates issuing the final by October 2010.)
The report must contain:
- The facility name
- The year and month covered by the report
- The date of submittal
- Annual emissions of all GHGs expressed in metric tons of CO2e
- Annual emissions of CO2, CH4 and N2O
- A written explanation if the emission calculate methodology has changed during the reporting period
- A brief explanation of the best available monitoring method used
- Each data element for which a missing data procedure was used and the total number of hours in the year that a missing data procedure was used
- A signed and dated certification provided by the designated representative
For Subpart C facilities, an abbreviated report can be submitted in the first year. The requirements of the abbreviated report are set forth in 40 CFR § 98.3(d)(3). All subsequent reports must follow the reporting format under 40 CFR § 98.3(c).
The first annual GHG report is due March 31, 2011 and must be submitted electronically in a format specified by EPA. With some exceptions, GHG reporting is at the facility level and must follow reporting protocols prescribed by EPA.
If subject to the Rule, a facility must submit GHG reports annually (See 40 CFR § 98.2). A facility can stop reporting if its annual reports demonstrate that its emissions are: (1) less than 25,000 metric tons of CO2e per year for five consecutive years, or (2) less than 15,000 metric tons of CO2e per year for three consecutive years. In addition, the Rule allows facilities that stop operating all greenhouse gas emitting sources to cease annual reporting. Such facilities must provide notice to EPA and certify closure of all GHG emitting processes and operations.
The Rule requires that each facility designate a representative responsible for certifying, signing, and submitting the annual report (40 CFR § 98). The representations, submissions, and actions of the designated representative are legally binding on the owner and operator of the facility. In most cases, the designated representative should be an officer or managerial employee of the owner and operator. The EPA will not accept an annual report without a complete certificate of representation identifying the designated representative for the facility. The complete certificate of representation must be submitted at least 60 days before the deadline for the submittal of the annual report. Therefore, electricity-generating units subject to either Subparts C or D should submit their certificate of representation by January 28, 2011.
Record Keeping Requirements
Facilities regulated under the Rule must maintain records required under the Part 98 general provisions and any other records required by an applicable Part 98 subpart.
Under 40 CFR § 98.3(g), the following records must be maintained:
- A list of all units, operations, processes, and activities for which GHG emissions were calculated
- The data used to calculate the GHG emissions for each unit, operation process, or activity
- The annual GHG report
- Missing data computations
- A written GHG monitoring plan
- The results of all required certification and quality assurance tests of continuous monitoring systems, fuel flow meters, and other instrumentation
- Maintenance records for all continuous monitoring systems, flow meters, and other instrumentation
Electricity-generating units subject to Subparts C and D have additional record-keeping requirements (See 40 CFR § 98.37). Records can be in electronic or hard copy format and must be retained for at least three years. Records may be stored offsite if readily available for inspection and copying.
Failure to Comply
Failure to comply with the Rule could subject a facility to civil and potentially criminal enforcement under the Clean Air Act.
As identified in the Rule, potential violations include:
- Failure to report GHG emissions
- Failure to collect data needed to estimate GHG emissions
- Failure to continuously monitor and test as required
- Failure to keep records needed to verify GHG emissions
- Failure to estimate GHG emissions according to the applicable methodology
- Falsification of data or reports
Under 42 U.S.C. § 7412, EPA can seek civil penalties up to $37,500 per day per violation, as well as criminal penalties against the corporation, responsible corporate officers, and the designated representatives.
Endangerment Findings and Administrative Actions
On December 7, 2009, EPA issued an endangerment finding that GHGs threaten both the public health and the public welfare and that greenhouse gas emissions from motor vehicles contribute to that threat.
EPA’s endangerment finding has two distinct parts, which are:
- The “Endangerment Finding” in which the EPA found that the mix of atmospheric concentrations of six key, well-mixed greenhouse gases threatens both the public health and the public welfare of current and future generations
- The “Cause or Contribute Finding” in which the EPA found that the combined greenhouse gas emissions from new motor vehicles and motor vehicle engines contribute to the atmospheric concentrations of these key greenhouse gases and hence to the threat of climate change.
EPA’s “Endangerment Finding” has allowed EPA to regulate GHG emissions from motor vehicles and stationary sources.
On May 7, 2010, EPA and the United States Department of Transportation published a joint final rule establishing GHG emission standards and improving fuel economy for light-duty vehicles. The new standards will apply for model year 2011 through 2016 (See 75 FR 25324).
On May 13, 2010, EPA issued its final rule establishing GHG emission thresholds for purposes of permitting under Clean Air Act Prevention of Significant Deterioration (PSD) and Title V Operating Permit programs. The rule, commonly referred to as the “Tailoring Rule,” adjusts the statutory emissions thresholds applicable to PSD permits (100 tons per year [tpy] for certain sources and 250 tpy for the rest) and Title V permits (100 tpy) for GHGs. The new rule covers the same GHGs regulated under the reporting rule.
The first phase of the new rule goes into effect on January 2, 2011. In phase one, certain new and existing PSD sources and certain existing Title V sources and will have to address GHG emissions. Specifically, new or existing PSD sources seeking modifications based on the emissions of non-GHG pollutants will have to address GHGs if the GHG emissions equal or exceed 75,000 tpy on a CO2e basis. For existing Title V permits, GHGs will need to be addressed when the facility modifies or renews its permit if the facility emits GHGs.
Phase two of the rule goes into effect on July 11, 2011 and requires permitting for sources that previously would not have had to obtain a federal permit under PSD or Title V program. After July 11, 2011, new construction projects that emit: 1) GHGs at the statutory levels (250 tpy or 100 tpy for certain sources), and 2) 100,000 tpy or more on a CO2e equivalent basis will need to obtain a PSD permit.
In addition, a major stationary source will be subject to PSD review if it makes a modification that results in a net GHG emissions increase on a mass-basis, which equals or exceeds 75,000 tpy on a CO2e basis. A Title V permit will be required for those existing or new sources that emit or have the potential to emit at least 100 tpy of combined GHGs on a mass-basis and at least 100,000 tpy on a CO2e basis.
EPA’s final rule does not exempt any industry-specific sources. However, the Rule exempts all sources with emissions below 50,000 tpy on a CO2e basis and modifications resulting in net GHG increase of less than 50,000 tpy on a CO2e basis. In application, this exemption should exclude any existing Title V sources with GHG emissions less than 50,000 tpy on a CO2e basis. EPA may reconsider these minimum thresholds after April 30, 2016.
PSD sources subject to the rule will be required to implement best available control technology (BACT). EPA’s Tailoring Rule does not specifically address BACT. EPA is in the process of developing BACT policy guidance to control GHGs. Title V sources subject to the rule will be required to incorporate GHG-related requirements into their operating permits. Currently, these requirements are limited to the reporting requirements discussed above.
Congress could stop EPA’s recent initiatives. In early March, Senator John D. Rockefeller (D–West Virginia) introduced a bill to delay EPA action on GHG emissions from power plants and other stationary sources for two years. Senator Lisa Murkowski (R–Alaska) has also introduced a resolution to withdraw EPA’s endangerment finding which would essentially veto EPA’s regulations. House Minority Leader John Boehner (R–Ohio) has also introduced a formal resolution disapproving of EPA’s endangerment finding. A cap and trade program could potentially block EPA regulations. However, until Congress acts, EPA will continue to regulate GHGs.
EPA’s Tailoring Rule will have significant impacts on the electric utility industry. EPA estimates that up to 15,500 sources representing 67% of the GHGs emitted from stationary sources will be impacted by the rule. Sources potentially subject to the rule include power plants, refineries, cement production facilities, and landfills. Nearly all of these sources have either a PSD or Title V permit. These sources will have to address GHG emissions and could be subject to BACT.
On February 8, 2010, the SEC issued an interpretive release intended to provide clarity and improve consistency in climate change disclosure for publicly traded companies. The disclosure requirements related to climate change matters include certain sections of Regulation S-K, one of the regulations promulgated under the Securities Act of 1933.
Item 101 of Regulation S-K, Description of Business, requires disclosure of the material effects that compliance with laws may have on capital expenditures, earnings, or a company’s competitive position. Item 103 of Regulation S-K requires disclosure of material legal proceedings. Item 303 of Regulation S-K, Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A), requires disclosure of known trends, uncertainties, or events that will, or are likely to, materially affect a company’s operations. Item 503 of Regulation S-K requires a discussion of significant factors that make an investment speculative or risky.
The interpretive release does not mandate specific disclosure. Each company must assess its own business, the impact to it of climate change, and determine the material information to disclose. The SEC considers information to be “material” if there is a substantial likelihood that a reasonable investor would consider that information important in deciding how to invest. In making its analysis, a company should evaluate both the likelihood that a risk or opportunity, or a known trend or uncertainty, related to climate change will develop, as well as the effect to the company of that risk, opportunity, trend, or uncertainty, if it does develop.
Areas of Potential Disclosure
The SEC suggested a non-exhaustive list of categories, described below, where climate change developments may trigger disclosure obligations:
- Existing and Pending State and Federal Legislation and Regulation. Recent and ongoing developments in climate change regulation could have a material effect on a company’s business. For example, if existing or pending legislation causes a company to plan material capital expenditures, the company must disclose those estimated expenditures in the business description. Likewise, pending legislation could create a known uncertainty for a company
that triggers disclosure obligations
- Evaluate the Positive and Negative. Climate change regulation may create opportunities for some companies. For example, a company falling below its allowable emissions allotment under a proposed cap and trade law may profit in the future by selling its allowances or, if the company is not covered by statutory emissions caps, any offset credits for which it qualifies.
- Avoid Generic Risks. Companies should avoid generic risk factor disclosure and focus instead on risks specific to them. For example, the interpretive release notes that GHG regulation creates significantly different risks for companies in different sectors, such as energy and transportation.
- International Accords. If treaties or international accords relating to climate change materially affect, or are reasonably likely to materially affect, a company’s business, a company must disclose the effects in satisfying its disclosure obligations. Examples of climate change–related treaties or international accords that could have a material impact on certain companies include the Kyoto Protocol, the European Union Emissions Trading System, and other international activities related to climate change.
- Indirect Consequences of Regulation or Business Trends. Legal, technological, political, and scientific developments related to climate change may have indirect consequences to a company that create material business trends or risks. If so, the company should disclose these indirect consequences as risk factors, in MD&A or, if significant, in Description of Business.
- Impact on Demand. When evaluating indirect consequences, companies should consider whether developments related to climate change increase or decrease demand for their goods and services in a material manner. For example, demand may increase for products that result in lower greenhouse gas emissions, as compared to those that produce significant emissions, and services that support the use of alternative energy sources, as compared to carbon based energy sources.
- Impact on Reputation. With increasing public availability of data relating to a company’s greenhouse gas emissions, a company should consider whether public perception of the data could negatively affect its reputation, leading in turn to adverse consequences on the company’s business operations or financial condition.
- Physical Impacts of Climate Change. Changes to the climate or environment, such as severe weather and resource availability, may affect a company’s business. A company should consider whether the effects of changes in climate or on the environment are, or are reasonably likely to be, material to its business, financial condition, or results or operations.
Although the release does not implement any new requirements, companies should consider this guidance closely. The newly clarified expectations regarding climate change disclosure may provide an opportunity for an SEC enforcement action or an investor suit alleging that a company did not adequately disclose the material impacts of climate change or related risks.
In order to avoid enforcement actions and other litigation, companies should regularly and actively review their existing disclosure considering the rapidly changing landscapes of climate change regulation, emerging emissions reduction, and alternative energy technologies and business trends related to climate change issues. What is not material now could become material later. In addition, the SEC may issue further guidance or rulemaking related to climate change disclosure after it gathers more information about how companies respond to the guidance issued in February.
Other Disclosure Considerations
Following the SEC guidance, in March 2010, ASTM published its Standard Guide for Financial Disclosures Attributed to Climate Change, E2718-10. (ASTM is an international standards organization that develops and publishes technical standards for a wide range or materials, products, and services. ASTM’s standards do not have the force and effect of law but are routinely followed by industry.)
The ASTM standard describes six circumstances that may give rise to a “material” impact that may require disclosure:
- Enforcement of laws or regulations regarding GHG emissions
- Predicated changes/trends in resource costs or availability that could change a company’s products or services
- Predicated changes in a company’s assets due to financial impacts attributed to climate change
- Contractual assumption of risk or risk transfer agreements
- Commencement of litigation or assertion of a claim related to climate change
- Information known to the company indicating a financial impact attributed to climate change that has occurred or will likely occur
The standard also provides guidance on the appropriate disclosures to be made if a company believes its financial impacts attributed to climate change are “material.”
In addition to the SEC guidance and ASTM standard, energy companies (and other significant emitters) should consider the disclosure requirements imposed on Dynegy Inc., Excel Energy Inc., and AES under settlements with the New York State Attorney General. In 2007, the Attorney General initiated an investigation into the climate change disclosure practices of these companies. Under the settlements, each company is now required to disclose the financial risks from GHG regulation, litigation related to climate change and the physical impacts of climate change.
To the extent the company’s GHG emissions materially affect its financial exposure from climate change risk, the company must also disclose: (1) a statement of the company’s current position on climate change; (2) the company’s estimated GHG emissions, any expected increase in emissions, strategies to reduce climate change risk, and the results of strategies implemented to date; and (3) corporate governance actions concerning climate change. The disclosure provided by these companies may become the benchmark disclosure for companies in this sector.
Companies should also consider climate change concerns raised by shareholders, including concerns expressed by competitors’ shareholders. As of March 2010, 95 climate change resolutions have been filed during the 2010 proxy season with 82 US and Canadian companies, according to Ceres, a coalition of investors, environmental groups, and other public interest groups. These resolutions request increased disclosure, emissions reductions goals, and other items. This is a 40% increase over the number of climate change shareholder resolutions filed in 2009. The resolutions were filed by many of the nation’s largest public pension funds, as well as labor, foundation, religious, and other institutional investors, with companies such as Conoco Philips, ExxonMobil, Southern Company, and Dynegy.
- Establish verifiable and auditable systems to track GHG emissions.
- Begin to account for GHG emissions as of January 1, 2010.
- Install monitoring equipment if required.
- Select a designated representative and submit the certificate to EPA.
- Analyze the impact of greenhouse gas regulation and climate change on finances and operations.
- Evaluate and, if necessary, revise existing disclosure in light of the recent SEC guidance.
- Watch for future regulations or guidance from the EPA and SEC.
Author's Bio: Jeffrey Hunter is a partner at Perkins Coie, a full-service international law firm.
Author's Bio: Ellen Sheedy is an associate at Perkins Coie, a full-service international law firm.